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Discoverci by The Discoverci Team - 1M ago

Today we’ll cover how to find the intrinsic value of a stock.

In fact:

This is the same approach we used to develop our stock valuation algorithm.

Walmart (WMT) Intrinsic Value Results - DiscoverCI Stock Valuation Software

First we'll define intrinsic value.

Next we'll review the models used most frequently by analysts to calculate intrinsic value.

Then we'll look at an intrinsic value example.

Let’s dive right in.

Introduction to Intrinsic Value

Intrinsic value is defined in many different ways.

We define intrinsic value based on Warren Buffett’s definition:

“Intrinsic value is an all important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

When the stock temporarily overperforms or underperforms the business, a limited number of shareholders – either sellers or buyers – receive outsized benefits at the expense of those they trade with.”

- Warren Buffett

Said differently, at any given time a stock has an intrinsic value, which is the actual value of a company’s discounted future cash flows.

Intrinsic Value = Present Value of a Company’s Lifetime Discounted Cash Flows

If a company's intrinsic value was obvious, you would either buy or sell the stock depending on whether the market price was higher or lower.

Unfortunately, a stock’s intrinsic value is never obvious.

This results in stock prices being driven by available information and each investors’ own interpretation.

How To Calculate Intrinsic Value

There isn’t one model or formula that investors agree is the best model for forecasting future cash flows.

But almost all of the leading investment banks use some version of a discounted cash flow (DCF) model to calculate the value of a stock.

There are two main DCF models that get the most attention from investors:

1. The Dividend Discount Model (DDM)

The Dividend Discount Model is the most simplified form of a DCF model.

This approach calculates a stock’s current intrinsic value based on the sum of expected future dividends, discounted back to present value.

The DDM works well when valuing companies with some history of paying dividends.

It also works better for companies that have future cash flows that are difficult to predict.

2. Free Cash Flow to the Firm (FCFF) Model

Free cash flows to the firm are company cash flows, after investing in working capital and fixed assets.

FCFF represents the remaining cash that can be distributed to debt and equity holders after a company reinvests earnings.

This model is the most commonly used valuation approach by financial analysts, because it values the total company, including debt, and not just equity.

The value of a company is determined in a FCFF model by discounting future cash flows, adding non-operating assets, and subtracting outstanding debt.

In this way, it incorporates the complete enterprise value of a company.

Other Valuation Models

It’s important to note that intrinsic value is not an absolute number.

It should be viewed as an expected value within a range of other alternative values.

There are several other valuation models that calculate a company's intrinsic value, and each one may return a different value: 

  1. Economic Value Added (EVA) Model
  2. Benjamin Graham Valuation Formula
  3. Reverse DCF Model

These models are generally used less frequently than the DDM or FCFF model.

Recapping The Intrinsic Value Models

Each of these valuation methods have strengths and weaknesses.

But the most widely used approach is the free cash flow to firm model.

Let’s dive deeper into this model in our case study over the intrinsic value of Walmart (NYSE:WMT).

Intrinsic Value Example: Calculation of Walmart (WMT) Intrinsic Value

Free cash flow to the firm models can be completed in four steps:

  1. Estimate the company’s free cash flow during the growth period.
  2. Discount the estimated free cash flows by the weighted average cost of capital (WACC).
  3. Calculate the terminal value.
  4. Determine the enterprise value and the value of equity.

Let’s complete each of these steps to find the intrinsic value of Walmart.

Step #1: Estimate the Company’s Future Free Cash Flow

The first step in the intrinsic value calculation is to find the Company’s current free cash flow.

Current Free Cash Flow

You should use the most recently available information in your model, which is the trailing twelve month (TTM) period results.

Free cash flow is calculated in a number of different ways.

In our model, we use the formula:

FCFF = EBIT (1 - tax rate) - (Capital Expenditures - Depreciation) - (Change in Cash-Free, Debt-Free Net Working Capital)

For example, in our valuation model for Walmart, we calculate the TTM free cash flow based on the following:

Walmart (WMT) TTM Free Cash Flow

The current period free cash flow is used as the base year in the FCFF model.

Projected Growth Rate

The growth rate used in the model has a big impact on the overall valuation.

Four key factors should be considered when determining the growth rate:

  1. Is the Company impacted by economies of scale?
  2. Does the growth rate reflect the different business cycles of the Company?
  3. Is competition likely to enter the market and impact the Company’s future growth rate?
  4. Can the Company sustain their return on investment, and is the growth rate supported by the total value of the industry and the Company’s current market share?

In reality the projected growth rate will be an estimate. There is no way to know future growth with 100% certainty.

A few common methods for estimating a growth rate are:

  1. Use analyst estimates
  2. Use actual historical growth rates of a company
  3. Use a combination of both

In our model, we use a combination of analyst estimates and historical growth rates of EBIT, EPS, and return on capital.

Using this approach, we calculated Walmart’s expected growth rate at 3.20%.

Valuation Model Input Form - Projected Growth Rate of 3.2% Projected Growth Period

In our DCF analysis of Walmart, we use a two-stage growth model.

Which means our model includes a high growth period of 3.20% year-over-year for the first five years.

The growth rate for the last five years of the model is reduced each year until it reaches the expected terminal growth rate of 2%.

The larger a company gets, the harder it is to maintain high growth rates.

The two-stage growth model takes this into account, which results in a more accurate projection of future cash flows.

Future Projected Free Cash Flows

Our model projects Walmart’s free cash flow over the next 10 years at:

Walmart (WMT) 10-Year FCFF Projection Table Step #2: Discount the Estimated Free Cash Flows by the Weighted Average Cost of Capital (WACC)

The next step in the FCFF model is to discount the projected free cash flows to net present value (NPV).

The discount rate that should be used in a FCFF model is the WACC.

The WACC model uses different inputs to calculate a company’s cost of capital including both debt and equity.

You can read more about the WACC and use our WACC calculator here.

For Walmart, our algorithm calculated a WACC of 4.47%:

Walmart (WMT) Weighted Average Cost of Capital

Using the WACC as the discount rate, the present value of Walmart’s future cash flows during the two-stage growth period is $89.8 Billion:

Sum of the Discounted Cash Flows During Growth Period Step #3: Calculate the Terminal Value

The intrinsic value of a company is theoretically the present value of future cash flows from now until forever…

But since it is impossible to project cash flows over an infinite period, a terminal value is calculated.

The terminal value represents the ongoing value of a company after the original growth period.

In our model, this occurs after 10 years.

This value is purely theoretical, but it is the best method available to calculate the total value of a company’s future cash flows.

The terminal value starts with the free cash flow from the last year in your growth stage valuation, and a constant growth rate is applied.

Analysts often use the risk free rate as the constant growth rate in the terminal value calculation.

We use a rate of 2% in our model to be conservative, and a normalized WACC as the discount rate to calculate the terminal value.

Step #4: Determine the Enterprise Value and the Value of Equity

With the future cash flow projection completed, the next step is simple math to arrive at Walmart’s intrinsic value:

Walmart (WMT) Intrinsic Valuation Summary

First, the terminal value is added to the present value of the discounted cash flows:

$212.8 Billion = $90.8B + $212B

This is the value of the Company’s operating assets.

Second, the value of cash and other non-operating assets are added to arrive at an enterprise value.

Enterprise Value = Value of Operating Assets + Cash and Non-Operating Assets

The enterprise value is then reduced by total debt to determine the equity value of the Company.

In our model, we combine the enterprise value and equity value calculation using net debt, which results in the same outcome:

The last step is to calculate the intrinsic value per share:

Intrinsic Value Per Share = $161B / 2.95B Shares Outstanding = $54.58 Per Share

Final Analysis and Fact Checking

Our calculated intrinsic value indicates that Walmart is currently overvalued.

But it’s important to continue your analysis beyond the intrinsic value.

There could be other factors impacting the Company’s market valuation.

  • Is the growth rate used in the model reflecting all available information?
  • Are there significant market or economic trends impacting the valuation that are not included in the model?
  • Are the reinvestment rates used in the valuation model reasonable?

Remember that Intrinsic value changes over time.

Continue updating your valuation model frequently to understand how fundamental and overall market changes impact a stock’s intrinsic value.


Now that you know how to find the intrinsic value of a stock, you can better understand a company before investing.

For more tips on how you can take your stock analysis to the next level, check out our post covering fundamental analysis 101.

And if you’re looking for awesome, undervalued stocks to buy right now, we break down 4 simple screens to find undervalued stocks here.

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Finding undervalued stocks can be a difficult task.

But if it were easy, everyone would be doing it.

Because of this, investors who commit the time and effort needed to find undervalued stocks can realize a high return on their investment.

If you want to find awesome stocks at discount prices, then you’ll love the four quick and simple approaches to finding undervalued stocks in this guide.

Let’s dive right in.

Starting Your Search: The Stock Screeners

The fastest way to narrow down your search for undervalued stocks is to use an advanced stock screener.

You’ll need a screener that you can customize, with fundamental data, like the DiscoverCI Stock Screener.

The screens below are designed to identify stocks with ratios that indicate they may be priced “cheaply” by the market compared to their underlying fundamentals.

There are four main screens that are widely used by value investors to find awesome stocks that are undervalued by the market:

  1. Price to Book Ratio: Trade stocks with equity values close to, or at a low multiple of book value.
  2. Price to Earnings Ratio: Trade stocks that are priced at a low multiple of earnings.
  3. EV/EBITDA Ratio: Trade stocks with low enterprise values compared to EBITDA.
  4. Dividend Yields: Trade stocks with high dividend yields.

All of the above trading strategies have been back-tested extensively over the years, and are proven to outperform the market if executed correctly.

But there are several traps you need to avoid while using each of these screens.

With that, it’s time to look at each of these screens in greater detail.

Screen #1: Price to Book Value Screen

Book value theoretically represents the total amount a company is worth if you sold all of its assets and paid back all of its liabilities.

The formula to calculate book value is simple:

Book value of a company = Total assets – Total liabilities

Typically, companies trade at higher valuations than their book value.

This is because investors expect them to continue operating and growing shareholder value.

For example, below is Amazon’s (NASDAQ:AMZN) Price to Book Value ratio since 2008:

Amazon Inc's Historical Price to Book Value

You can see that Amazon’s market price has traded around 20 times it’s book value since 2015.

Before investors realized the potential of Amazon, it was trading at around 10 to 15 times it’s book value.

Now going back to the price to book value screen.

The screen is a quick way to identify companies that the market doesn’t expect to experience high growth going forward.

Why does this represent an opportunity?

Because the general market isn’t always right when it comes to predicting growth. If a company with a low price to book value grows at a faster rate than expected, that could mean it is undervalued right now.

There is no perfect P/BV ratio to use in your screen. It really depends on the industry.

But generally when you’re looking for value, the lower the better.

For example, you could screen for stocks with low price to book values:

DiscoverCI Stock Screener - Valuation Ratios

And then sort the list of stocks from low to high:

Stock Screener Results - P/BV Low to High

But you can see there are over 3,500 stocks that are included in this list.

That doesn’t give you a great starting point for your research.

A better approach is to include additional criteria to narrow your search, and remove stocks with warning signals.

There are several strengths and weaknesses of the price to book value screen:

  • High returns if a company outperforms expected growth
  • Liquidation value is close to market value
  • Stocks with low price to book values have historically gone out of business at a higher percentage
  • Generally low growth companies, with the expectation of slow growth in the future
  • The unknown risk factors. Stocks generally trade higher than their book values, so why is this company trading for close to, or less than book value?

To limit the above risks, and return a better list of companies that are potentially undervalued, additional criteria can be added to the P/BV screen:

  • TTM Revenue Growth Greater Than 5% (Remove Low Growth Companies),
  • Price to Book Ratio Less Than 2,
  • Altman Z Score Greater Than 2.75 (Lower Risk of Bankruptcy),
  • Outstanding Debt Less Equity (Indicator of Safety), and
  • Return on Invested Capital Greater Than 10% (Remove Companies With Low Quality Growth).

With the additional criteria, you can see that a more focused list of stocks is returned:

List of Awesome Stocks with Low P/BV

You can also find the most recent results of this screen here.

Screening for stocks with low price to book value ratios is a great way to find undervalued stocks, but it’s not the only way.

Next up, the price to earnings screen.

Screen #2: Price to Earnings Screen

The price to earnings (P/E) ratio gets a lot of attention from investors.

For good reason.

This ratio is a great metric for benchmarking the equity valuation of a stock, and understanding how the market views a company’s expected growth.

You’re probably familiar with the formula to calculate price to earnings, but just in case:

Price to Earnings = Stock Price / Earnings Per Share

Companies with high P/E ratios are generally classified as growth stocks.

They are considered growth stocks because investors are paying a price per share that is much greater than current earnings.

By screening for stocks with low P/E ratios, you can find companies that would be undervalued if their future earnings growth is higher than the current expected growth.

To start, you could simply screen for stocks with a P/E ratio greater than zero:

DiscoverCI Stock Screener - Price to Earnings Screen

And sort from low to high:

Stock Screener Results - P/E Low to High

This again returns a huge list of companies, and doesn’t provide any additional analysis outside of the price to earnings ratio.

One of the risks of the P/E ratio screen is that it will return companies with very limited growth potential.

Another weakness is that companies with negative earnings aren’t included in the screen.

Let’s add more criteria to make this a more useful screen, and remove companies with higher risk, and low historical growth:

  • TTM EBITDA Growth Greater Than 10% (Remove low or no growth companies),
  • Price to Earnings Ratio Less Than 10,
  • Outstanding Debt Less Equity (Indicator of Safety), and
  • Return on Invested Capital Greater Than 10% (Remove Companies With Low Quality Growth).
Low P/E Stocks With Strong Fundamentals - Stock Screener Results

Now that is a decent list of potentially undervalued stocks.

Next up, the EV/EBITDA screen.

Screen #3: Enterprise Value to EBITDA Screen

As discussed earlier, there are weaknesses with using Price to Earnings as a screen for undervalued stocks.

Recently, many investors have argued that using Enterprise Value to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a better screening method.

A company’s EV/EBITDA is calculated using the formula:

EV/EBITDA = (Market value of equity + Debt – Cash) / EBITDA

A company’s EV/EBITDA is less impacted by financial leverage, and is focused on EBITDA, which is a better cash flow measure than earnings.

The downside of the EV/EBITDA ratio is it removes taxes, which most investors agree is an ongoing cost of any company.

EBITDA can also cover-up low returns on invested capital, because of the mechanics of adding back Depreciation and Amortization to earnings.

Because of this, when using the EV/EBITDA stock screen, it’s important to include metrics that limit the risk of identifying an underperforming company.

Using our EV/EBITDA stock screener, we scanned for stocks meeting the following criteria:

  • TTM EBITDA Growth Over 10%,
  • Debt to Equity Ratio Less Than 75%,
  • TTM ROIC Greater Than or Equal to 10%, and
  • EV/EBITDA Less Than 8.

Which returned a list of 145 stocks meeting these criteria:

EV/EBITDA Stock Screener Results

Another list of awesome stocks to further analyze!

If none of the first three screens returned stocks that meet your investment criteria, we have one more option...

Screen #4: The Dividend Yield Screen

If you’re an investor looking to add income generating stocks to your portfolio, companies with high dividend yields are a good place to start.

Dividend yield measures a company’s dividend per share as a percentage of it’s stock price:

Dividend Yield = Dividend Per Share / Price Per Share

This ratio is helpful in finding awesome stocks with high dividend payments.

But there is risk with investing in stocks that have high dividend yields, including:

  • The dividend may be unsustainable because the company is paying out too much of its free cash flow
  • Companies that pay a significant dividend have less cash flow to reinvest and grow future earnings
  • Low performing companies may use high dividends to attract anxious investors

Luckily, there are other ratios we can use to remove stocks from our search that contain these warning signs:

Dividend Payout Ratio

Dividend Payout Ratio = Dividends Paid / Net Income

The dividend payout ratio measures how much of a company’s net income is paid out in dividends.

If a company’s dividend payments represent a significant portion of net income, that is a big warning sign that the dividend may not be sustainable.

Debt to Equity Ratio

Debt to Equity Ratio Formula = Total Debt / Total Equity

The debt to equity ratio measures a company’s total debt, relative to its total equity.

Companies with higher debt to equity ratios generally pay a higher cost for capital. They are also more impacted by overall economic changes.

This can be an indicator of greater risk, which makes the debt to equity ratio a useful metric to remove higher debt leveraged stocks from the screen.

These ratios are important metrics to help narrow your search and remove companies that don’t meet your investment requirements.

Our dividend yield stock screen scans the market daily for stocks meeting these requirements:

  • Dividend yield greater than 3% (indicates high dividend payments),
  • Dividend payout ratio less than 100% (indicates the Company isn’t paying more than 100% of its income in dividends),
  • Debt to Equity Ratio less than 1 (more stable companies),
  • EPS growth greater than 5% (continuing to grow operations),
  • Altman Z Score greater than 2.75 (low risk of insolvency and bankruptcy).

The screen returned 50 stocks with strong dividend yields, and equally strong fundamentals:

Dividend Yield Screen Results

Another great list of companies to begin analyzing!

The Stock Screening Template

These four screens are based on valuation measures that help identify whether a stock is over or undervalued.

But by themselves, they have limited use.

We covered the weaknesses of each of these ratios, but it’s worth repeating - if a stock has low valuation ratios, there may be a good reason for it.

That’s why including additional metrics in your screen, and analyzing each stock in greater detail before investing is a key step in finding undervalued stocks.

Our four screens are based on a screening approach, which you can also use in your search for awesome stocks:

  • Screen for cheap stocks: Start by using a ratio that identifies stocks that are “cheap” (P/BV, P/E, EV/EBITDA).
  • Search for stocks with low risk: We used the Altman Z Score and the Debt/Equity ratio in our screens, but you can use other ratios and metrics that accomplish the same goal (i.e., beta, standard deviation, etc..).
  • Find growing stocks: Stocks that appear cheap have a higher risk of slow future growth. Look for stocks with a recent history of growth, or a competitive advantage that you believe will lead to future growth.
  • Identify quality indicators: You’re looking for well-managed stocks ready to grow and provide a ton of shareholder value. Remove companies that don’t meet this criteria. You can use a return on invested capital ratio, or another ratio that measures growth quality.

With practice and patience, you’ll soon find the screening criteria that works best for your unique investment strategy over the long term.

Now It’s Your Turn

Finding stocks that generate a high return on investment is the number one goal of every investor.

Identifying stocks with low market prices compared to their intrinsic value, and holding them for the long term is one way to achieve this goal.

We hope this guide gives you the tools you need to find your next investment.

And don’t forget to let us know if you find an awesome screening formula that should be added to our list!

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Before you start analyzing a stock, it’s important to understand the basics.

This guide covers the core concepts of fundamental analysis, and how to use them to make better investment decisions.

The best part?

These are the same techniques that the best value investors are using right now to make money in the stock market.

In short: if you want to effectively analyze a stock, you’ll love this guide.

Let’s get started.

What is fundamental analysis?

Fundamental analysis is the practice of evaluating a company’s financial results to make a more informed investment decision.

In practice, this can mean a lot of things:

  1. Analyzing a company’s balance sheet, income statement and cash flow statement
  2. Using financial data to calculate an independent value of a Company
  3. Reviewing economic data and industry trends

Fundamental analysis is usually a long term investing strategy.

Why is this the case?

Because the core belief of fundamental investors is that market prices do not accurately reflect all available information on a company. This means, at any given time, a stock is either overvalued, undervalued or priced right at its intrinsic value.

For example, let’s say Warren Buffett completes his fundamental analysis of Microsoft, and believes that the stock is undervalued.

This means other investors haven’t correctly valued the stock. Buffett would buy the stock and then wait for more investors to realize that the stock is undervalued.

Once other investors realize that Apple is undervalued, they will buy the stock too, and drive the price per share higher.

But here's the bad news:

It could be days, months or years before other investors find the stock.

Buffett may need to hold the stock for a long time before making a profit.

Why is fundamental analysis important?

The alternative to fundamental analysis is an investment strategy based on price and/or momentum. The most well-known alternative is technical analysis, which looks at trends or patterns in a company’s stock price to predict future price movements.

And while that may be helpful in predicting how the market will price a stock, it doesn’t tell you what the company’s stock price should be.

This is why fundamental analysis is so important.

Without analyzing a company’s fundamentals, you’re simply trading based on price and speculation.

How do you perform fundamental analysis?

Every company is different, which means your stock analysis may be different for each company as well.

But there are some guidelines to follow that generally always apply:

Basic principles:
  • Fundamental analysis is based on measurable outputs. You are using the facts and information that is available to make an informed investment decision. This means avoiding speculation and “gut-feelings” that drive some investors to buy stocks they don’t truly understand.
  • The goal is to completely understand a company, it’s industry, key risk factors, and it’s potential for growth. There is no clear road map to follow that applies to every company. The best fundamental investors find and analyze the unique information that matters most to a company’s performance.
  • At the end of the day, earnings drive value. Fundamental investors want to invest in companies that make a lot of money. When a company is making money they can reinvest and drive growth, or distribute the excess cash to shareholders (i.e., dividends). Either way, it’s a win/win.

These basic principles of fundamental analysis are important for value investors to understand. But the things you should avoid can be almost as important to your analysis.

Things to avoid:
  • Companies with limited historical information. Analyzing a company is very difficult without the right data. Warren Buffett famously avoids investing in start-ups and IPO’s for this very reason. How can you fully understand a company, if you don’t have access to the right information?
  • Don’t let bias drive you to a conclusion. Like anything, our own biases can impact the way we interpret information. If you go into analyzing a stock thinking that the stock is undervalued, you will undoubtedly find information to support that conclusion. It’s important to remain unbiased and take a fact-based approach to analyzing a company.
  • Stale or out-of-date information can hurt your analysis. It’s important to use the most recent information to evaluate a stock.
  • Stay away from luke-warm investments. If you aren’t sure about a company, it’s best to error on the side of caution. One key trait of all great fundamental investors is that they avoid stock market losses. If you find both positives and negatives in your analysis, it’s best to move on to the next company, and avoid buying a stock you don’t fully understand.
  • Lastly, fundamental analysis is not a one-time event. With new data releases, updated financial statements, and changes in stock prices, your fundamental analysis will change too. You may conclude that a stock is overvalued one year, but then new information becomes available that changes your conclusion. That is OK. A company’s intrinsic value doesn’t stay the same. Outside factors and new information can change a company’s value.
Fundamental analysis example

The more you analyze stocks the faster and better you become at it.

If you want to make money in the stock market by using fundamental analysis, developing a consistent approach is important.

Before building DiscoverCI, we used customized excel workbooks and data templates. This was a very labor-intensive process!

So, we developed DiscoverCI to make it easier to analyze every stock.

For example, if we were evaluating Microsoft (NASDAQ:MSFT), the first thing we would do is a run a discounted cash flow model (“DCF”) to calculate the intrinsic value of the Company.

There are many elements to a DCF analysis, but it boils down to projecting the future cash flows of the Company, and discounting them back to present value.

Using this method, you are able to independently calculate a fair value for the stock, and then compare it to the current stock price.

Our model is showing that Microsoft is currently overvalued:

Microsoft (MSFT) Intrinsic Value Using the DiscoverCI Valuation Tool

On the surface, this means the Company’s future cash flows don’t support the current market price of the stock.

But your analysis shouldn’t stop here, value investors spend time analyzing each of the key inputs into the model to make sure they are reasonable.

For example, our model used a growth rate of 8.25%, which is based on a mix of historical results, and analyst projected growth.

But what if you had a different outlook?

Using the valuation input form, we changed the growth rate in our model to 15% (which, you can do here as well), and re-ran the valuation.

Microsoft (MSFT) Intrinsic Value Using the DiscoverCI Valuation Tool

As you can see, this change increased the intrinsic value of the Company to a position that would imply they are undervalued by the market.

Stock valuation can be subjective and sensitive to the inputs used in the model, but it is a necessary element to fully analyze a company.

Let’s say that based on your valuation, you felt Microsoft could be undervalued.

The next step is to analyze the relevant factors and determine whether Microsoft looks like an awesome company with high future growth potential, or if there are indicators that a downturn could be coming.

This means using a checklist to perform an initial screen of the stock.

Each of the stocks we cover includes a score calculated based on the following ratios:

  • Piotroski F Score
  • Altman Z Score
  • Price to Book Value (P/BV)
  • Current Ratio
  • Price to Earnings (P/E)
  • Earnings Yield
  • Revenue Growth
  • EBITDA Growth
  • Debt to Equity

Based on these ratios, Microsoft is currently scoring a 3/9 on our checklist:

Microsoft (MSFT) Financial Ratio Checklist Score - DiscoverCI

These ratios are a mix of metrics that measure a company’s liquidity, potential for growth, market valuation, and overall health of the Company.

These may not be the only critical metrics for a company, but they are a good place to start.

We also use a checklist to compare the Company’s current growth ratios to historical and sector averages:

Microsoft (MSFT) Sector and Historical Avg. Checklist - DiscoverCI

Knowing how a company compares to it’s past, and industry averages, can be a great way to analyze where the company is heading.

Over To You

Now we’d like to hear from you:

What do you think of fundamental analysis so far?


What is working well for you so far?

Either way, let us know, and if you’re interested in checking out more of our stock analysis tools, here are a few places to start:

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Discoverci by The Discoverci Team - 5M ago

It’s true, large cap stocks can provide more stable returns in the stock market. But what about traders seeking more risk and volatility?

Look no further than actively traded penny stocks.

While investing in these stocks is more of a gamble than betting on blue-chip stocks, the pay off can be significant.

If you’re an investor looking to add volatility to your portfolio as we move into 2019, here is a list of 11 NASDAQ penny stocks with high beta and trade volume.

The criteria used to identify these stocks was:

  1. Traded on the NASDAQ Exchange
  2. Stock price under $5
  3. Average daily trading volume over 3 million
  4. Beta over 1.5

*All price and stock information is accurate as of December 6th, 2018.

1. NII Holdings Inc (NIHD)

Average Daily Volume: 3,853,440  
Market Capitalization: $481 Million
Beta: 2.02
52 Week High: $8.51
52 Week Low: $0.23
Adjusted Close Price: $4.98

NII Holdings Inc (NASDAQ:NIHD) engages in the development and provision of wireless communication services, and is headquartered in Virginia, United States. NIHD was founded in 1995, and it’s current CEO is Steven Shindler. NII Holdings competes in the Technology Sector.

NII Holdings (NIHD) Stock Price Chart and Quote. Source: DiscoverCI.com 2. Merrimack Pharmaceuticals Inc (MACK)

Average Daily Volume: 3,766,298  
Market Capitalization: $71 Million   
Beta: 1.67
52 Week High: $11.70
52 Week Low: $3.34
Adjusted Close Price: $4.20

Merrimack Pharmaceuticals  Inc (NASDAQ:MACK) engages in discovering, developing and preparing to commercialize innovative medicines, primarily for the treatment of cancer. Merrimack Pharmaceuticals is headquartered in Massachusetts, United States and was was founded in 1993. The Company competes in the Healthcare - Biotechnology Sector, and it’s current CEO is Richard Peters.

Merrimack Pharma (MACK) Stock Price Chart and Quote. Source: DiscoverCI.com 3. Frontier Communications Corp (FTR)

Average Daily Volume: 35,513,948  
Market Capitalization: $673 Million  
Beta: 2.19
52 Week High: $11.64
52 Week Low: $3.30
Adjusted Close Price: $3.33

Frontier Communications Corp (NASDAQ:FTR) engages in providing voice, data, and video services to urban, suburban, and rural customers. Frontier Communications is headquartered in Connecticut, United States and was was founded in 1935. The Company competes in the Technology - Telecom Services Sector, and it’s current CEO is Daniel McCarthy.

Frontier Communications (FTR) Stock Price Chart and Quote. Source: DiscoverCI.com 4. OPKO Health Inc (OPK)

Average Daily Volume: 4,029,795  
Market Capitalization: $1.91 Billion
Beta: 1.59
52 Week High: $6.40
52 Week Low: $2.66
Adjusted Close Price: $3.25

OPKO Health Inc (NASDAQ:OPK) is a diversified healthcare company, operating through Diagnostics, and Pharmaceutical segments. OPKO Health is headquartered in Florida, United States and was was founded in 1991. The Company competes in the Healthcare - Biotechnology Sector, and it’s current CEO is Phillip Frost.

 OPKO Health (OPK) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 5. Office Depot Inc (ODP)

Average Daily Volume: 6,727,498  
Market Capitalization: $1.77 Billion 
Beta: 1.58
52 Week High: $3.66
52 Week Low: $2.00
Adjusted Close Price: $3.12

Office Depot Inc (NASDAQ:ODP) offers office products and services to a diversified customer base in North America. Office Depot is headquartered in Florida, United States and was founded in 1986. The Company competes in the Services and Specialty Retail Sectors, and it’s current CEO is Gerry Smith.

 Office Depot (ODP) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 6. Groupon Inc (GRPN) 

Average Daily Volume: 5,496,891  
Market Capitalization: $2.17 Billion 
Beta: 1.51
52 Week High: $5.88
52 Week Low: $2.80
Adjusted Close Price: $3.08

Groupon Inc (NASDAQ:GRPN) is a local commerce marketplace that connects local merchants to customers by offering flash discounts on goods and services. Groupon is headquartered in Illinois, United States and was was founded in 2008. The Company competes in the Technology Sector, and it’s current CEO is Richard Williams.

 Groupon Inc (GRPN) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 7. Windstream Holdings Inc (WIN) 

Average Daily Volume: 3,261,745  
Market Capitalization: $208 Million 
Beta: 1.80
52 Week High: $11.20
52 Week Low: $2.61
Adjusted Close Price: $2.88

Windstream Holdings Inc (NASDAQ:WIN) provides communication and technology solutions through their Consumer and Small Business Enterprise solutions. Windstream is headquartered in Arkansas, United States and was was founded in 2013. The Company competes in the Technology - Telecom Sector, and it’s current CEO is Tony Thomas.

 Windstream Holdings (WIN) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 8. Novavax Inc (NVAX) 

Average Daily Volume: 5,398,890  
Market Capitalization: $698 Million
Beta: 1.66
52 Week High: $2.75
52 Week Low: $1.05
Adjusted Close Price: $2.01

Novavax Inc (NASDAQ:NVAX) is a clinical-stage biopharmaceutical company, which develops and nanoparticle vaccines and adjuvants, primarily to target infectious diseases. Novavax is headquartered in Maryland, United States and was was founded in 1987. The Company competes in the Healthcare - Biotechnology Sector, and it’s current CEO is Stanley Erck.

Novavax (NVAX) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 9. MannKind Corp (MNKD) 

Average Daily Volume: 5,163,803  
Market Capitalization: $277 Million
Beta: 2.53
52 Week High: $4.05
52 Week Low: $0.98
Adjusted Close Price: $1.75

MannKind Corp (NASDAQ:MNKD) is a biopharmaceutical company, focusing on the discovery, development and commercialization of therapeutic products for diseases, such as diabetes and cancer. MannKind is headquartered in California, United States and was was founded in 1991. The Company competes in the Healthcare - Biotechnology Sector, and it’s current CEO is Matthew Pfeffer.

MannKind Corp (MNKD) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 10. Plug Power Inc (PLUG) 

Average Daily Volume: 5,767,521  
Market Capitalization: $427 Million
Beta: 1.62
52 Week High: $2.48
52 Week Low: $1.53
Adjusted Close Price: $1.62

Plug Power Inc (NASDAQ:PLUG) provides alternative energy technology, which focuses on the design, development, commercialization and manufacture of fuel cell system. Plug Power is headquartered in New York, United States and was was founded in 1997. The Company competes in the Technology - Diversified Electronics Sector, and it’s current CEO is Andrew Marsh.

 Plug Power (PLUG) Stock Price Chart and Stock Quote. Source: DiscoverCI.com 11. CytRx Corp (CYTR)

Average Daily Volume: 11,274,283  
Market Capitalization: $34.5 Million 
Beta: 1.71
52 Week High: $2.35
52 Week Low: $0.56
Adjusted Close Price: $0.57

CytRx Corp (NASDAQ:CYTR) operates as a biopharmaceutical research and development company specializing in oncology. CytRx is headquartered in California, United States and was was founded in 1985. The Company competes in the Healthcare - Biotechnology Sector, and it’s current CEO is Steven Kriegsman.

 CytRx (CYTR) Stock Price Chart and Stock Quote. Source: DiscoverCI.com

Trading penny stocks is a high risk and high reward game.

Given the uncertainty of these 11 stocks, we don’t recommend investing in these companies without proper due diligence.

Penny stocks are typically traded by professionals with years of experience with advanced stock picking software at their disposal. This makes achieving consistent gains by trading penny stocks very difficult.

If you are looking for more actively traded penny stocks, check out our customized stock screener.

Our stock screener gives you the control to find and screen for stocks according to your unique investment strategy.

Select the criteria and benchmarks that fit with your investment strategy to find undervalued stocks to add to your portfolio.

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Discoverci by The Discoverci Team - 5M ago

There are plenty of dividend stocks you can choose from in the United States, but don’t forget about the top Canadian dividend stocks as well.

Investing in Canadian stocks that pay a consistent dividend can increase your monthly income, diversify your portfolio, and protect against adverse market movements.

Below are 7 high yielding Canadian stocks for you to consider adding to your portfolio as we move into 2019.

*All price and stock information is accurate as of December 4th, 2018.

1. City Office REIT Inc (CIO)

Dividend Yield: 8.54%

Dividend Payout Ratio: 90.11%

Stock Price: $10.96

Marketcap: $464 million

City Office REIT Inc (NYSE:CIO) is a real estate investment trust, headquartered in British Columbia, Canada. City Office REIT acquires, owns and operates office properties primarily within the Southern and Western United States. The Company was founded in 2013, and it’s current CEO is James Farrar.  City Office REIT competes in the Financial Services - Real Estate Sector, and has grown revenue from $58 million in 2016, to $66 million in 2017, to $83 million during the Trailing Twelve Month (TTM) period ended September 30, 2018.

From July 2014 to December 2018, City Office REIT's average monthly dividend yield was 7.54%. 

City Office REIT (CIO) monthly dividend yield from 2014 to 2018. Source: DiscoverCI.com 2. Enbridge Inc (ENB)

Dividend Yield: 7.29%

Dividend Payout Ratio: 210.50%

Stock Price: $32.87

Marketcap: $58.1 Billion

Enbridge Inc (NYSE:ENB) is an oil and gas company, headquartered in Alberta, Canada. ENB was founded in 1949, and it’s current CEO is Albert Monaco. ENB competes in the Energy Sector, and has grown revenue from $34.6 billion in 2016, to $44.4 billion in 2017, to $47.7 billion during the TTM period ended September 30, 2018.

From December 2015 to December 2018, Enbridge Inc's average monthly dividend yield was 5.51%. 

Enbridge Inc (ENB) monthly dividend yield from 2015 to 2018. Source: DiscoverCI.com 3. Mercer International Inc (MERC)

Dividend Yield: 5.00%

Dividend Payout Ratio: 25.46%

Stock Price: $12.14

Marketcap: $1.09 billion

Mercer International Inc (NASDAQ:MERC) is a pulp company, headquartered in British Columbia, Canada. MERC was founded in 1968, and it’s current CEO is David Gandossi. MERC competes in the Consumer Non-Durables Sector, and has grown revenue from $931 million in 2016, to $1.2 billion in 2017, to $1.4 billion during the TTM period ended September 30, 2018.

From December 2009 to December 2018, Mercer International's average monthly dividend yield was 1.51%. 

Mercer International Inc (MERC) monthly dividend yield from 2009 to 2018. Source: DiscoverCI.com 4. Restaurant Brands International Inc (QSR)

Dividend Yield: 3.10%

Dividend Payout Ratio: 53.71%

Stock Price: $56.28

Marketcap: $28.7 billion

Restaurant Brands International Inc (NYSE:QSR) is a quick service restaurant company, headquartered in Ontario, Canada. QSR was founded in 2014, and it’s current CEO is Daniel Schwartz. QSR competes in the Leisure Restaurants Sector, and has grown revenue from $4.1 billion in 2016, to $4.6 billion in 2017, to $5.2 billion during the TTM period ended September 30, 2018.

From December 2014 to December 2018, Restaurant Brands' average monthly dividend yield was 1.37%. 

Restaurant Brands International Inc (QSR) monthly dividend yield from 2014 to 2018. Source: DiscoverCI.com 5. Ritchie Bros. Auctioneers Inc (RBA)

Dividend Yield: 2.60%

Dividend Payout Ratio: 60.50%

Stock Price: $33.39

Marketcap: $3.97 billion

Ritchie Bros. Auctioneers Inc (NYSE:RBA) is an industrial auctioneer company, headquartered in British Columbia, Canada. RBA was founded in 1958, and it’s current CEO is Ravichandra Saligram. RBA competes in the Business Services Sector, and has grown revenue from $566 million in 2016, to $610 million in 2017, to $745 million during the TTM period ended September 30, 2018.

From December 2013 to December 2018, Ritchie Bros. Auctioneers' average monthly dividend yield was 2.56%. 

Ritchie Bros. Auctioneers Inc (RBA) monthly dividend yield from 2013 to 2018. Source: DiscoverCI.com 6. Imperial Oil Ltd (IMO)

Dividend Yield: 2.39%

Dividend Payout Ratio: 41.92%

Stock Price: $28.97

Marketcap: $25.8 billion

Imperial Oil Ltd (AMEX:IMO) is an integrated oil company, headquartered in Alberta, Canada. IMO was founded in 1880, and it’s current CEO is Rich Kruger. IMO competes in the Energy Sector, and has grown revenue from $27.4 billion in 2016, to $29.4 billion in 2017, to $35.3 billion during the TTM period ended September 30, 2018.

From December 2007 to December 2018, Imperial Oil's average monthly dividend yield was 1.69%. 

Imperial Oil Ltd (IMO) monthly dividend yield from 2007 to 2018. Source: DiscoverCI.com 7. Open Text Corp (OTEX)

Dividend Yield: 2.10%

Dividend Payout Ratio: 62.69%

Stock Price: $34.25

Marketcap: $10.2 billion

Open Text Corp (NASDAQ:OTEX) is an independent software company, headquartered in Ontario, Canada. OTEX was founded in 1991, and it’s current CEO is Mark Barrenechea. OTEX competes in the Technology Sector, and has grown revenue from $2.3 billion in FY2017, to $2.8 billion in FY2018 (ended June 30, 2018), to $2.8 billion during the TTM period ended September 30, 2018.

From June 2008 to December 2018, Restaurant Brands' average monthly dividend yield was 31.71%. 

Open Text Corp (OTEX) monthly dividend yield from 2008 to 2018. Source: DiscoverCI.com

Dividend stocks are an important part of any good portfolio.

Adding these seven Canadian stocks will provide monthly income, and diversify geography risk if most of your holdings are U.S. Companies.

But… Remember to be careful, and research all stocks before investing. Especially stocks with unusually high dividends.

Some unstable stocks use high dividends to entice investors. But they aren’t generating enough cash flow to continue paying dividends at their current rate.

If you are looking for more of the highest yielding dividend stocks, check out our customized stock screener.

Our stock screener gives you the control to find and screen for stocks according to your unique investment strategy.

Select the criteria and benchmarks that fit with your investment strategy to find undervalued stocks to add to your portfolio.

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Understanding stock market terminology is an essential step to becoming a profitable investor.

In fact, not knowing these terms could end up costing you money down the road. With all of the stock market lingo out there, it’s not uncommon for an investor to think a term means one thing, when it actually means something else.

In this post we’ll cover 47 key stock market terms every trader needs to know in order to become an expert investor.

1. Stock Exchange

A stock exchange is a market that is a established to buy and sell stocks. Two of the main stock exchanges in the United States are the New York Stock Exchange (NYSE) and NASDAQ.

2. Stock Index

A stock market index is used to measure a section of the stock market. It is computed from the prices of the selected stocks within the index (typically a weighted average). Indexes are often used as a measure of the overall direction of the stock market. A few of the major stock indices are the S&P 500, the Dow Jones Industrial Average, the Russell 1000, and the NYSE Composite.

3. Bull Market

When the stock market is in a period of prolonged increasing stock prices, it is said to be a bull market. Individual stocks can be bullish or bearish too, as can certain groups of stocks, like a stock sector.

4. Bear Market

When the stock market is in a period of prolonged decreasing stock prices. This is the opposite of a bull market and can also apply to an individual stock or group of stocks.

5. Stock Quote

A stock quote is the current price of one share of a company’s outstanding stock. A stock quote usually provides additional information, such as the bid price, ask price, last traded price, and current volume.

6. Open Price

The open price is the price at which a stock first trades at the start of a trading day.

7. Closing Price

The closing price is the price at the end of the day when the stock market closes.

8. Bid Price

The bid price is the price a buyer is prepared to pay for one share of a company’s stock.

9. Ask Price

Ask price is the lowest price a person selling a stock is willing to accept for a share of that stock.

10. Volume

Volume is the number of shares traded during a period of time. A stocks daily volume shows how many times it was traded that day.

11. Volatility

Stock volatility is a statistical measurement of a company’s change in stock price. It is measured by the standard deviation or variance between returns from the stock.

12. Beta

Beta measures the volatility of a company’s stock compared to the overall market. By definition the market beta is 1.0. A stock’s price swings more than the market over time if it has a beta greater than 1.0. Companies with a high beta generally are higher risk, because their stock price experiences larger and more frequent pricing swings.

13. Shares of Stock

Investors often use the term “shares” interchangeably with stock. The stock of a company is all of the shares that are divided between the different owners.

14. Share Price

A company’s share price (or, stock price) represents the cost to purchase a single share of company.

15. Fundamental Analysis

Fundamental analysis attempts to identify which stocks have a market price below their intrinsic value, and thus, provide a high value investment. Investors using fundamental analysis believe that market prices do not accurately reflect all available information on a company. This can result in discrepancies between market pricing and the actual fair value of a stock, which can be used to a traders advantage.

16. Financial Analysis

Financial analysis relates to analyzing a company’s income statement, balance sheet, and cash flow statement. This is often done by calculating financial ratios, which are then compared to market and industry competitors.

17. Investment Strategy

An investment strategy is a set of guidelines or rules used by an investor to select stocks for investment. There are lots of different investment strategies. Value investing, growth investing, and investing based on technical analysis are a few common investment strategies.

18. Value Investing

Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors look for undervalued stocks, and generally hold these stocks for longer periods of time.

19. Technical Analysis

Technical analysis is often considered the opposite of fundamental analysis. This strategy uses charts and market trends to identify patterns in a company’s stock price. Technical traders use these patterns and trends to attempt to predict future movements in a Company’s stock price.

20. Growth Investing

A growth investing strategy attempts to identify stocks that will experience rapid future growth. This strategy typically performs best in a period of strong overall market performance.

21. Blue Chip Stocks

Blue chip stocks are popular stocks to buy for dividends. These stocks usually pay higher dividends, because they are often times more mature companies with lower future growth potential. They are usually some of the larger stocks within each individual industry.

22. Dividend Payment

Dividends are cash payments to stockholders out of a company’s current earnings. Dividends are a way of attracting investors to buy a company’s stock. Not all companies pay dividends.

23. Dividend Yield

Dividend yield measures how much dividends a company pays to investors each year relative to its share price. Dividend yield is calculated by dividing the dollar value of dividends paid during the year per share of stock, by the dollar value of one share of stock.

24. Stock Valuation

Investors use different stock valuation methods to calculate the theoretical value of a company's stock. This can be compared to a company’s current value to determine if a stock is over or undervalued.

25. Price to Earnings Ratio (P/E Ratio)

A valuation ratio that compares a company’s stock price to its earnings. The formula to calculate a stock’s price to earnings ratio is: Close Price / ( Net Income / Weighted Average Shares Outstanding).

26. Market Capitalization (Marketcap)

Marketcap refers to the total market value of a company based on its stock price and total shares outstanding. Investors frequently use marketcap to measure the size of a company, which can be helpful when comparing two companies.

27. Shares Outstanding

When a company sells its shares to the public, it authorizes a certain amount of its stock that is available for sale. A company’s shares outstanding represents the number of stock units currently owned by investors.

28. Price to Revenue (P/Rev)

Another valuation ratio, which compares a company’s stock price to its revenue. The formula to calculate a stock’s price to revenue ratio is: Close Price / ( Total Revenue / Weighted Average Shares Outstanding).

29. Enterprise Value (EV)

Enterprise Value measures a company’s total value. The formula to calculate enterprise value is: Marketcap + Net Debt + Total Preferred Equity + Noncontrolling Interests + Redeemable Controlling Interest.

30. Earnings Before Interest, Taxes, and Depreciation (EBITDA)

EBITDA is a common metric used by investors to evaluate a company’s earning potential by adding back significant non-cash expenses to net income.

31. Enterprise Value to EBITDA (EV/EBITDA)

EV to EBITDA is a popular valuation tool, which compares the value of a company, debt included, to the company’s cash earnings less noncash expenses. EV to EBITDA is especially helpful for comparing companies within the same industry. To calculate EV to EBITDA, divide a company’s enterprise value, by its EBITDA.

32. Intrinsic Value

Intrinsic value is the value of a company determined through fundamental analysis, which is in contrast to valuing a stock based on market value. There are number of methods used by value investors to determine a company’s intrinsic value. Three methods frequently used are: (1) Discounted Cash Flow Analysis, (2) Analysis based on a Financial Metric (such as Price to Earnings), and (3) Asset Based Valuation.

33. Broker

A person (or website) who buys and sells a stock on your behalf for a fee.

34. Limit Order

A limit order is an order to buy or sell stock at a specific price or higher. A buy limit order would only be executed at the limit price or lower, and a sell limit order would only be executed at the limit price or higher.

35. Fill or Kill

Fill or kill (FOK) is when an investor submits an order to buy or sell a stock that is executed either immediately and completely, or not at all. The order is either filled within a couple of seconds, or is cancelled. No partial completion of the order is allowed.

36. Buy or Sell Rating

Buy or sell is a measuring tool that investors use to determine whether to buy or sell a stock based on its current price. Whether a stock receives a buy or sell rating depends on the investment strategy used to analyze the stock.

37. Sector

A market sector refers to a specific group of stocks. The group is determined by the markets in which they compete. Sectors are often determined by the type of product a company sells to customers. Examples would be the technology sector, or healthcare sector.

38. Industry

Industry and sector are often used interchangeably, but there is slight difference. A sector generally refers to a larger segment of the economy, while an industry describes a more specific group of companies.

39. Trading Day

The trading day refers to the hours in which a stock exchange is open for trading. For example the New York Stock Exchange is open from 9:30 AM Eastern Time to 4:00 PM Eastern Time. Trading days are usually Monday through Friday, but stock exchanges typically close on holidays as well.

40. Margin Account

A margin account is set up by an investor with their broker. A broker will then lend the investor cash to purchase shares of stock. The loan is collateralized by the stocks purchased and cash within the account. The investor is then charged an interest rate on the amount of cash received from the broker. A margin account is risky, because it allows a trader to invest more money in a stock than what they currently have in cash.

41. Day Trading

Day trading refers to buying and selling stock on the same day, which is usually done online. The goal of day trading is to profit on small, short-term fluctuations in a company’s stock. Day trading is generally higher risk than long-term investing.

42. Shorting a Stock

Shorting a stock, or short selling, involves selling a stock that an investor doesn’t own. The investor completes the sale by borrowing the stock from a third-party. The investor then pays back the third-party at a later date based on the then current value of the stock. Investors use this strategy when they believe a stock's price will decrease.

43. Stock Screener

A tool used by investors to search for stocks that meet a specific criteria. Stock screeners are useful to find stocks in a particular industry, or stocks that meet an investors investment strategy.

44. Averaging Down

Averaging down is a reference to the common stock investing mentality of buying low and selling high. Investors average down by accumulating shares over a longer period of time (rather than buying all shares at the same time). This helps investors avoid buying shares at a company’s peak.

45. Initial Public Offering (IPO)

When a company first offers to sell its shares to public buyers. This happens when a company decides to trade its stock on a stock exchange, rather than remain owned by only private and inside investors.

46. Annual Report (Form 10-K)

A company’s annual report, or Form 10-K, is a required document that a public company must file with the SEC once every year. This report is used by investors to evaluate a company’s annual financial performance.

47. Backtesting

Backtesting is used by investors to test a potential trading strategy against historical results. A strategy is tested against historical results to measure how well it would have predicted a stock’s performance.

With repetition and experience, stock market terminology will be part of your daily vocabulary in no time.

Below are a few additional resources that dive deeper into these stock terms:

Did we miss any stock terms that you’d like to see on this list? Let us know and we’ll get them added!

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We’ve all been there. Mid conversation with a co-worker or friend, and they throw in a word or two that leaves you scratching your head.

This isn’t uncommon in the investing world, as words and terms that have one meaning in our everyday life, end up meaning something different in the context of the stock market.

The terms bearish and bullish are a few of these terms.

You may have a general understanding of what each term means, but today we’ll focus on clarifying and expanding on these terms, including:

  • What does the term “bullish” mean?
  • What does the term “bearish” mean?
  • What qualifies as a bearish vs bullish market?
  • How to make money in a bearish or bullish stock market.

By the end of this article you’ll be ready and prepared to react to a bearish or bullish stock market, and also be prepared with a quick response the next time someone uses these terms.

What does the term “bullish” mean?

Bullish is a term used to describe an investor who believes that the price of a stock is going to go up. As you can probably guess, a bull market is used to describe the stock market when prices are rising over a sustained period of time.

A bullish investor would generally be buying stocks with the belief that the price will rise over the long-term.

Bullish investors often say they are “long” in a stock, referring to the expectation that they will make money on the stock as the price trends upwards.

The origin of the term “bullish” comes from the act of a bull striking upward with its horns, which is correlated to the upward trend in the stock market.

What does the term “bearish” mean?

Inversely, the term bearish describes an investor who believes that the price of a stock will go down, and a bear market describes a stock market that is going down over a sustained period of time.

A bearish investor would generally be selling their position in a stock with the belief that the price will fall over the long-term.

The origin of the term “bearish” comes from the act of a bear striking down with its paws, which is correlated to the downward trend in the stock market.

When does a market change from bearish to bullish?

A bull or bear market doesn’t develop overnight. If the market is down one day, and it begins going up the next day, the daily fluctuation in market direction would not qualify as a bull or a bear market.

The exact timing of when a market is classified as bullish vs bearish isn’t defined, but by tracking the market and studying trends in the market indices, you can begin to identify when a bull or bear market is developing.

It is important to track these trends and fluctuations in the market to monitor investor sentiment, which can result in stock market momentum pushing a stock’s price down or up, without any changes to the intrinsic value of the stock.

How to make money in a bearish or bullish market

Most people think of investing with a bullish mindset, meaning:

The only way to make money in the stock market is to buy a stock at a lower price, and sell it at a higher price.

But you may be wondering:

If I’m bearish on a stock, how can I make money trading the stock if I expect the price to fall?

The answer has some complexities, but to get down to it - you can sell a stock at a high price and buy it back at a lower price.

This is called shorting a stock.

Let’s say a stock is trading at $10 per share and you sell 100 shares for $1,000. At this point, you would have negative 100 shares of the stock, which you would need to settle up within a certain time period.

Let’s assume your bearish feeling was correct and the stock moves lower to $9 per share and you buy back the 100 shares for $900 to bring your account back to zero shares owned.

When you sold the shares you received $1,000 and you paid $900 to buy them back at a lower price. The result is $100 of profit by short selling the stock!

If your bearish feeling was wrong, and the price went up after you first sold the shares, you would have ended up being forced to buy back the shares at a higher price, which would result in losing money on the trade.

Short selling can be difficult, and there is additional risks involved. If you buy $1,000 of stock, you know that even if the stock went to zero your maximum loss would be $1,000. But if you short a stock that is currently priced at $10 and it jumps to $30 before you buy back the shares, you could end up losing $20 per share!

You can read up on short selling in more detail by checking out Investopedia’s explanation here.

Are you a bull or a bear?

In the stock market game, the bears and the bulls are pulling in opposite directions.

Being bearish vs bullish on a stock impacts your investing strategy and decision making, and ultimately dictates how you invest in a stock.


You are now ready to talk the talk of a pro investor. Get out there and drop some knowledge on your friends and co-workers, and let them know if you’re bullish or bearish on the market.

And if you’re looking to screen for stocks that fit your investing criteria, and assist in your valuation of a stock, be sure to check out our customizable stock screener.

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Whether you’re Warren Buffett or a brand new investor, spotting opportunities to invest in companies at a discount is key to success in the stock market.

Value investors know that market prices do not always reflect all available information on a company, and that discrepancies can exist between market pricing and the actual fair value of a stock.

But finding companies that are undervalued by the market, and identifying them before the rest of the market jumps on board is another animal altogether.

Unlike Warren Buffett, most value investors don’t have access to automated investing platforms, or insider connections at some of the largest companies in the world.

So, the question is... how can you compete and win in the stock market by finding undervalued stocks that deliver big returns?

If you have a knack for spotting value, and are motivated to take your stock market investing to the next level, then this is the article for you.

In this article we’ll cover a few main points:

  • What are the key indicators that a stock may be undervalued,
  • How to use these indicators to search for potential investment ideas and develop a value investing strategy, and
  • Value stock screeners and other tools for value investors that will help make your life easier.
How to find stock opportunities and developing a value investing strategy

Using a value investing strategy to win in the stock market is not for the faint of heart. As the old saying goes, “if value investing was easy, everyone would be doing it…”

OK, maybe that isn’t an old saying, and maybe the first time I’ve heard it said was when I wrote it down, but it remains true all the same.

Value investors don’t approach investing as a get rich quick scheme, and they don’t buy stocks based on advice from their cousins uncle, who heard that a stock is going to double over the next six months from their sister in-law’s best friend.

Successful value investors take an in-depth approach to finding and investing in stocks, and approach investing in stocks with a long-term perspective.

As we cover in greater detail in our article over fundamental analysis, a key element to all value investing strategies includes a belief that over time, a stock’s market price will ultimately gravitate towards its fair value.

This is good news!

Since you know this, you can take advantage of inefficiencies in the market by buying stocks that are priced below their fair value.

Your goal is to identify these stocks and ride the wave as they trend upwards towards their higher fair value.

That sounds good… but how do you know when a stock is undervalued?

Good question.

So, we know that being a value investor isn’t easy, but the pay-off can be significant when done correctly, what next?

Performing financial analysis and analyzing a company’s fundamentals are at the core of identifying and investing in undervalued stocks.

This often time takes the form of a detailed financial statement analysis, a deep dive into a company’s financial ratios, or researching macro economic trends that could signal future growth in a company’s industry or sector.

Analyzing a company’s financial ratios can lead to unlocking key insights into a company’s potential for growth and their current competitive positioning.

In our article covering the 5 step framework for effective financial ratio analysis we break this down in more detail, but knowing a company’s historical results and where its been, can lead to a better understanding of where the company is heading.

A deep understanding of the company and its key performance metrics (KPI’s), along with knowing how a company stacks up against its peer group and competitors, is a vital step in finding undervalued stocks that will lead to big returns down the road.

A few indicators that a company could be well positioned for future growth are:

These metrics are the tip of the iceberg when it comes to identifying undervalued stocks.

Identifying indicators that a company is undervalued is part science and part art, and can vary from company to company. Using an effective value stock screener, and other research and analysis tools can simplify the process of identifying these metrics and finding value investing ideas.

We’ll be covering these tools for value investors shortly, but before we do, let's talk a little bit about how these indicators and metrics can be used to identify undervalued stocks.

How to use company data and company metrics to find profitable investments

There is a lot of data out there on public companies.

The Securities Exchange Commission requires companies to report certain metrics and disclose certain items to investors on an interim and annual basis. Value investors realize the benefit of this by using the information to analyze potential investments and monitor ongoing investments.

There are a few ways to find this data in order to use it in your analysis:

1. Annual Reports (SEC Form 10-K)

These reports are required to be filed by publicly traded companies on an annual basis. They provide significant details about a company, and not just financial details.

Reviewing a company's annual report can tell you more about the potential risk factors of a company, potential commitments and/or contingencies that may impact future results, and much more.

Reviewing these reports takes a lot of discipline, but for evaluating the metrics that a company’s management team determines is important, there is no better source.

Those are the positives, and there is one big negative…

Investors generally don’t enjoy reading through these reports... and who can blame them!

Annual reports are dense, and depending on the company, reading through all of the fluff and disclosures in order to find the information that interests you can be about as fun as a 6am trip to the dentist.

Another way to track market movements and company data is to follow market analysts and other “experts” who cover the company that interests you.

2. Analyst and “Expert” Ratings

A quick Google search will tell you, there will be at least one person that has an opinion on pretty much every publicly traded stock.

There is no shortage of analysts and hobby traders that are ready and waiting to give their opinion on stocks, whether you asked for it or not...

Using the information provided by these individuals can have a positive or negative impact on your analysis, depending on the source of your information.

It is true that analysts generally have a pulse on the market, and are aware of breaking news and market trends very quickly (after all, it is their job), but that doesn’t mean they should be blindly trusted.

There’s a reason almost 22,000 people search for “best stocks to buy now” on Google each month - they want someone to tell them which stocks to buy, rather than perform their own research.

There is also a reason why most people who blindly follow an analyst or expert recommendation don’t end up experiencing long-term gains in the stock market.

Reading an analysts list of stocks to buy can give you a starting point for further research and analysis, but always make sure you’ve done your own due diligence before investing in a stock.

3. Finance and Stock Market Websites

If you’ve been in the investment game for more than a few minutes, you know there are a lot of websites out there that provide information on stocks.

The primary websites you may be familiar with include: morningstar.com, yahoo finance, and marketwatch.com. If you’ve used these tools to analyze stocks, you may also be familiar with constant ads and slow speeds, which can make completing your analysis a time consuming project.

It is possible to get a full picture and understanding of a company by bouncing between the different finance sites, but from my experience, this process is slow, and data that I thought was important was missing from several of these sites.

Another point of frustration for value investors using these sites for investment analysis is that most of these websites are focused on providing tools and data for technical investors. While technical indicators can be important, the data required for value investors to complete fundamental stock analysis is different that what a technical investor would require.

Finding the necessary information to evaluate a company before investing can be difficult and consolidating this information and calculating the important company metrics and trends from this data can be just as hard.

If you’re a microsoft master, formatting and performing calculations on large data sets is possible in excel, but for most investors, this turns into a time waster, which takes you away from your most important objective - actually analyzing the results of those calculations.

The best tools for value investors and how to use a value stock screener for more efficient research

You know when people say, “this is going to be a great opportunity” but what they really mean is... “this is going to be a lot of work?”

This can be the same for value investing if you take a manual approach to your analysis.

When it comes to value investing, there are no shortcuts to fully understanding a company and evaluating potential investments. There is no replacement for knowing the underlying factors that have the most impact on the performance of the company.

Obviously, getting to a point of fully understanding a company takes time and can be a tedious process. Maybe it was just me, but when I analyzed stocks this way it could take forever to identify potential value stocks to invest in, and then analyze each of those stocks.

Which is why my team and I created DiscoverCI. This platform does exactly what we just talked about:

  • Provides an advanced value stock screener with customized screening, so you have the option to modify the screener criteria for metrics that are most important to you
  • Tells you more about a company than just their current price, change in price, and basic financial statements
  • Includes non-financial data, such as social media presence, company keywords, number of employees and key management team members
  • Gives you data visualization tools to benchmark and compare companies side-by-side

Here is a quick rundown to give you an idea of how we use these tools to effectively and quickly search for, and analyze potential investments.

1. Establish Your Key Value Investing Criteria

Before beginning a search for stocks that could be undervalued, you have to know where to look. Knowing where to look means knowing the criteria that matters to you, and to the companies that you invest in.

For value investors who follow the approach of Benjamin Graham, this may mean looking for a company that falls into one of the three categories outlined by Graham:

  1. Defensive
  2. Enterprising
  3. NCAV (Net Current Asset Value or Net-Net)

Or maybe you are looking for a company that is a mix of both aggressive (enterprising) and defensive. Let’s say one that has:

  • Current assets of at least twice current liabilities (i.e., current ratio of 2 or greater)
  • A current price that is less than 1½ times the book value
  • History of at least some current dividend
  • Earnings growth
2. Finding Value Investment Ideas and Opportunities

With your criteria in hand, let’s head to the stock screener and search for companies meeting this criteria:

First 10 results from value stock screener using DiscoverCI.com

There they are - the ones that passed your first test and made it to the second round of analysis.

If your criteria returned too few, or too many stocks, you can remove or modify your criteria until you end up with a list of companies that interest you and have the fundamentals that you are looking for in a potential investment.

With your list of potential stocks in hand, you can press forward and begin analyzing each of these stocks individually.

3. Evaluating Potential Investments

If you’re investing in a company, you want to know more than just the basics. You wouldn’t marry someone after your first date (or maybe a few of you would...), so why would you invest your cash into company that you don’t know or fully understand?

Getting to know a company takes time. First, it’s important to know the basics:

Company Profile for Air Lease Corp. (ticker: AL) from DiscoverCI.com

Before investing, I like to first know a few key items before going too far down the rabbit hole:

  • What’s their story? Where are they located, how many employees do they have, and what do they do.
  • Are they innovating and actively engaging with customers on social media and other platforms?
  • Who’s manning the ship? Do they have the right management team to deliver strong growth and returns to investors?
  • What’s revenue been doing over the last few years, and if sales are growing, are they managing margins and costs so earnings and EBITDA are trending upwards along with it?

Second, after knowing the basics, it's important to dig deeper and see how a few of the company’s key operating metrics are trending over time.

First, let's see how their Return on Equity (ROE) has been:

 Return on Equity chart for Air Lease Corp. since 2011

Not bad. 

Let's follow that up by checking on whether they've historically paid dividends to investors:

 Dividend Payout Ratio of AL since 2011 from DiscoverCI.com

For most companies, there are over 200 metrics that you can chart with the click of a button. Knowing how a company’s results are trending over time, can be a good indicator of the company’s potential for future growth.

Now that you know the company, check out how it measures up to its competition:

 AL vs. ARII using DiscoverCI.com's benchmark charting comparison tool.

You want to invest in the best. Investing in a great company that consistently is outperformed by its competition will most likely result in low, or negative returns on your investment.

That’s why knowing where a potential investment stands relative to its peers is a key part of effectively analyzing a company.

Once you’ve done this for one or two companies, your analysis goes quickly and you can rinse and repeat for each of the companies on your list.

For those companies that you want to follow and track further, add them to your follow list so updates and company news will be waiting for you on your dashboard. You can also use the quick charting tool to benchmark the companies you follow against one another.

Obviously, searching through websites, and charting the information within excel or other offline tools to complete the above steps would take some serious time.

If you’re interested in trying out the tools for yourself and experience how they impact your value investing analysis, sign up for a Free 7-Day Trial.

In Summary

Finding and analyzing stocks that meet the criteria of value investors can be difficult, but those investors who master the process can see big rewards for their effort.

There’s a big difference between value investing stock screeners and stock screeners designed for investors who don’t incorporate fundamental metrics into their stock investment strategy. You can use value stock screeners to hone in on the company metrics that are important to you, and cut down on the time it takes to find potential investments.

The right value investor, with the right tools, knowledge and disciplined approach can increase their investment returns and lower their risk in the stock market.

You can find and analyze stock data using the free methods described in this article, or sign up for DiscoverCI and let us take care of the dirty work for you. With DiscoverCI, valuable information and analysis tools are all at your fingertips.

Whichever method you use, just be sure to employ a detailed and educated approach to investing in the stock market and you will enjoy the rewards.

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Analyzing financial ratios can be overwhelming at first.

How do you start? Which financial ratios are the most important? What formulas should you be using?

All of these questions run through your head and stop you from getting started. But what if you had a process for ratio analysis that made analyzing these metrics more simple?

Well now you do.

This 5 step framework is going to help you be efficient in analyzing financial ratios and jump starting your ratio analysis.

This framework will help you organize your thoughts and better prioritize the steps necessary to efficiently and effectively analyze financial statement ratios, and give you an edge on your competition.

In this post, we’ll quickly cover the basics of financial ratios, as well as the different types of ratios, and then jump right into the 5 step framework to mastering ratio analysis.

Let’s get going!

What is Ratio Analysis?

Financial ratio analysis is an analysis of key company metrics and information contained in a company’s financial statements.

Financial ratios include multiple parts of a company’s financial statements, and one of the main benefits of utilizing financial ratios in your analysis is that it allows you to compare those metrics against a different company, which otherwise may not be comparable.

Analyzing financial ratios is the cornerstone of strong financial analysis and fundamental analysis.

Financial ratios are used to evaluate various aspects of a company’s operating and financial performance such as its liquidity, asset management, leverage, profitability and valuation.

Types of Ratio Analysis

The first step to a full analysis of a company’s financial statements begins with understanding the different types of ratios.

Liquidity Ratios

Liquidity ratios are used to assess a company’s ability to meet its short-term obligations using its short-term assets.

You can find the information to calculate these ratios under the current assets and current liabilities sub-headings on a company’s balance sheet.

By definition, an asset or liability is current if it’s expected to be converted into cash (asset), or is due to a creditor (liability) within one year of the financial statement date.

There are three important liquidity ratios that generally stand above the rest:

  1. Current Ratio = Current Assets / Current Liabilities
  2. Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
  3. Cash Ratio = (Cash + Marketable Securities) / Current Liabilities

Using these ratios in your financial analysis will help you identify whether a company is cash-strapped or well positioned to pay back amounts borrowed and still have enough to re-invest in growing the company.

Both traits of highly successful companies!

Asset Management Ratios

Asset management ratios, or as some of you may refer to them, efficiency ratios, are important to understanding if a company’s management team is effectively using the company’s assets to generate sales.

There are five asset management ratios you should be very familiar with when analyzing a company’s financial statements:

  1. Accounts Receivable Turnover = Net Annual Credit Sales / Average Accounts Receivable
  2. Inventory Turnover = Cost of Goods Sold / Average Inventory
  3. Cash Conversion Cycle = Inventory Processing Days + Average Collection Period - Payables Payment Period
  4. Fixed Asset Turnover = Sales / Average Net Fixed Assets
  5. Asset Turnover Ratio = Sales / Average Total Assets

Knowing a company’s asset management ratios will give you a better idea of how a company is managing its capital, and whether they are efficiently turning their assets into earnings for the company’s shareholders.

Strong companies utilize their assets to create additional cash flow and revenue for their business to reinvest and redeploy back into operating activities. If a company has too much of their capital tied up in assets, this can lead to shortfalls in operating cash flow, but if they have too few, or low performing assets, this can lead to low returns on investment.

Leverage Ratios

Leverage ratios, or debt management ratios, measure how much capital a company is utilizing comes in the form of debt (loans), and also analyzes the ability of a company to meet its required debt payments.

It’s important to understand leverage ratios given a company can rely on a mixture of equity and debt to finance its operations. Knowing the amount of loans held by a company allows us to evaluate whether the company we are analyzing can pay off its debts as they come due.

When a company has a strong management team and they are deploying capital as efficiently and strategically as possible, debt can be used as a catalyst for growth.

There are three main ratios that are broadly used by investors to analyze a company’s debt management:

  1. Debt Ratio = Total Debt / Total Assets
  2. Debt to Equity = Total Debt / Total Equity
  3. Interest Coverage = EBIT / Interest Expense

You can also calculate the weighted average cost of capital (WACC) to find the rate that a company is expected to pay investors and creditors to finance its assets. 

Our goal is to find companies to invest in that are well position to pay off their debt, and also using that borrowed money to grow.

What we don’t want to see is a company that is spread too thin and heavily leveraged, where they are using debt as a bridge to make payments on other obligations.

Borrowing from one lender to pay another lender is not a trait of a well managed and well positioned company!

Analyzing leverage ratios is a key step in effective financial analysis and fundamental analysis.

Profitability Ratios

Profitability ratios are what I like to call the “sexy” category of financial statement ratios because they are easy to understand, and they are usually the metrics analysts point to first when reporting on a stock.

And It makes sense that these ratios get a lot of attention.

Profitability ratios measure a key financial concept that we can all understand - is the company making money, or losing money.

A company could have great products, impressive management, and be well capitalized for future growth, but if they aren’t making money on their products, that company’s future starts looking pretty bleak.

There are five key profitability ratios that all stock gurus must understand before investing in a company’s stock:

  1. Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
  2. Operating Profit Margin = EBIT / Sales
  3. Net Profit Margin = Net Income / Sales
  4. Return on Assets = (Net Income + Interest Expenses) / Average Total Assets
  5. Return on Equity = Net Income / Average Common Equity

With profitability metrics, you can’t hide behind growing revenues, but increasing costs.

Strong profitability metrics mean a company is growing revenue, while controlling costs and generating net income.

Valuation Ratios

I think of valuation ratios as an investor’s last line of defense.

These ratios evaluate how the rest of the market is valuing a stock relative to a measure of the company’s fundamentals.

Typically the valuation is compared to earnings, book value, cash flows, and dividends, but several other company fundamentals could be used.

For now, we’ll focus on four valuation ratios:

  1. Price to Earnings = Market Price Per Share / Earnings Per Share
  2. Price to Book Value = Market Price Per Share / Book Value Per Share 
  3. Price to Cash Flow = Market Price Per Share / Cash Flow Per Share
  4. Dividend Yield = (Dividend Per Share**** x 100) / Market Price Per Share

Valuation ratios are critical to understanding whether a stock is priced below its market value.

Analyzing liquidity ratios, asset management ratios, leverage ratios and profitability ratios may indicate a company is hitting on all cylinders, but if the valuation ratios indicate that the company’s stock price is too high, this could be a signal that you shouldn’t invest.

So what’s the point?

At this point you may be thinking:

“alright... I understand financial ratios, as well as the different families of ratios, but that doesn’t do me much good if I don’t know what it all means.”

If you were thinking this... then I am telepathic, and you would also be right!

Financial ratios are just numbers on a page without further understanding and analyzing what they actually mean to a company and what that tells you about whether they are in good position to grow.

But don’t worry, we’re pressing on in our ratio analysis joy ride, and the next stop is taking a look at the 5 step process for discovering whether a company’s financial ratios are trending in the right direction and how it stacks up to their industry group.

The 5 Step Framework for Interpreting a Company’s Financial Ratios

We’re diving into the 5 step framework for effectively analyzing and interpreting a company’s financial statement ratios, and what better place to start than with the company itself.

1. Where to begin? Start with the company’s trends

The first step in your analysis is to see what you can learn from the historical results of the Company.

Public companies are required to disclose their financial results to investors on a quarterly basis (Form 10-Q, which is a more limited Filing than the annual report), as well as on an annual basis within their Form 10-K filed with the SEC. If you’re interested in learning more about the filing requirements of public companies, check out the SEC’s Website for everything you need to know.

Because of how frequently, and how much information is required to be reported by publicly traded companies, there is a lot of data out there that you can use to get an edge over your competition.

Once you know where a company currently stands, you can use this information to evaluate whether there are positive or negative historical trends that could impact the future results of the company.

For example....

Knowing where a company has been can tell us a lot about where they may be heading!

Let's say we are analyzing Apple Inc. (AAPL), and we’re looking at their current ratio.  

I always like to evaluate trends in graph-form, which seems to provide better insights than looking at 10 years of static numbers (plus, it’s just easier on the eyes).

Let’s take a look at Apple’s trend since 2007 and see what the numbers tell us:

Apple Inc.'s Current Ratio from 2008 to 2017

We can see from the chart that Apple’s current ratio has dipped when comparing it to several years ago (2008 and 2009, especially), but remains relatively consistent with a slight trend upwards from 2014 to 2017.

Hmm… this triggers a few questions…

Does this indicate Apple is on the downward trend? Or that Apple isn’t managing it’s liquidity as well as it once did?

To investigate this further, we can look at the company’s balance sheet to see if there is anything that jumps out as being the reason for the decrease in Apple’s current ratio over the last 10 years.

Apple Inc.'s Balance Sheet from FY2008 to FY2017.

Would you look at that - on a macro level, we can tell right away that Apple has changed as a company since its early growth days in 2008 (current assets have quadrupled!), which means that a change in financial ratios isn’t out of the ordinary.

We can also see that accounts payable and accrued expenses are a much larger percentage of the balance sheet when compared to previous years, and those balances continue to trend upward.

It would require more analysis to further evaluate whether the increase in accounts payable and accrued expenses is something that should concern you, but overall, analyzing the trends of the company’s current ratio, and following the numbers to spot the cause of the changes, gives us a good start to understanding how Apple is performing.

It’s important to follow where the numbers take you, until you feel like you have a solid understanding of what accounts are trending upwards, or downwards, and what that means to the company as a whole.

Now that we've got the history… What’s next?

As you can see, there is a lot to be learned from evaluating the trends and data within a company’s historical results.

But looking at a company’s historical results alone isn’t enough to get the full story.

What if you identify a company that has improved their ratios year-over-year, only to find out that the only reason they were showing strong growth was because they had a very low ratio to begin with?

You could end up making a bad decision based on incomplete data, and at DiscoverCI we don’t like making bad decisions… or incomplete data…

In order to make sure you drawing the correct conclusions from analyzing the trends of a company, its important to understand more about the company’s operations and how they stack up against their competitors.

So how you take your financial analysis to the next level and identify whether there is more to the story than what can be told by looking at one company’s financial statements alone?

It’s time to level up and introduce the power of industry and sector data in our analysis.

2. Leveling Up: Identify the Company’s Industry and Sector

The next 4 steps of our analysis will include the use of industry and sector data, so what is that makes this data so important?

Each industry (and in some cases each company), face different risks, capital requirements, acceptable margins, valuation multiples, etc… which can make comparing companies across industries difficult.

For example, Facebook (FB) reported Gross Profit Margin of about 87% for 2017 (whoa, that’s high), while Amazon’s (AMZN) Gross Profit Margin was about 24% during the same period.

 Amazon vs. FB using DiscoverCI.com's benchmarking tool.

What the heck. What was all that talk about Amazon being a solid, fast growing, well managed company? That Profit Margin looks pretty weak when you compare it to Facebook!

Well, the truth is, what everyone says about Amazon remains true, but comparing their Gross Profit Margin to Facebook’s wouldn’t be a level playing field because they are very different companies.

Think about it this way, the cost of Facebook to provide their core offering - advertising - is a lot less than Amazon’s cost of selling you a $10 bottle of shampoo. The difference being, Amazon is selling a physical product, where Facebook is selling their services/access to their audience.

The end result - margins are higher on every dollar that Facebook earns, compared to every dollar that Amazon earns, which you can clearly see my analyzing their Gross Profit Margin.

The different product offerings makes for a bad comparison between these two companies.

Financial ratios allow you to compare the operating metrics of different companies, which otherwise may not be comparable. But not all companies are built the same, and not all ratios are comparable from one company to another.

The goal of identifying and grouping companies within a sector or industry during your analysis is to accurately compare and benchmark the company you are analyzing against a comparative peer group.

If you don’t get this part of your analysis right, it can lead to some misinterpretations down the road. And when it comes to making smart business and investment decisions, misinterpretations can be costly!

Now we know why industry data is important…

Armed with the ratio we calculated in step 1, and the knowledge we gained from reviewing the company’s historical results, it’s time to begin the process of measuring how the company stacks up to its peers.

Where to begin:

Measuring a company against its peers may seem like a daunting task.

What industry does the company compete in? How do I know the peers of a company? Where do I get the information I need to calculate the industry metrics? How do I interpret the information?

All good questions.

And here is some good news…

We’re about to come through with the answers.

Finding the Industry and Sector of a Company

You may know the general product offerings of a company, but do you know where they fit into industry data?

Industry and Sector data can be broken down in a various ways, and there are several different indexes that group companies differently.

So where do you start?

SIC and Industry Codes

Every public company is required to report their Standard Industrial Classification Code, or “SIC” Code, within their annual report (Form 10-K). You can check out a full list of reported sectors on the here.

A Company’s SIC code can be a helpful launching point when you are looking to identify what industry a company is in, and start building up a peer group.

The SIC codes are grouped by general categories that each contain smaller sub-categories.

The sub-categories typically provide a fairly focused and accurate sector of a company, and the company groupings are fairly small.

As a bonus, the SIC code is generally very reliable information as the classification comes from the company itself, and it’s a regulated disclosure by the SEC.

If after further evaluating the SIC code, and taking a look at the other companies who are included within the SIC code you determine that more data is needed to better understand the industry, you can find additional information using an advanced stock screener, or by tracking down a company’s NAICS Code (North American Industry Classification System).

A good stock screener (like the one within the DiscoverCI Platform), will allow you to search for a company within more general industry classifications, which can further help you define the industry and sector of a company.

Now that you know the industry of a company, you can take the next step by gaining a better understanding of a company’s operations.

3. Understand the Nature of the Company’s Operations

How do you take your competitor benchmarking from good to great? Dig into the underlying data of the company’s industry competitors.

To further enhance your analysis, you should segment the companies you are benchmarking by key operating traits, which would impact the operations and comparability of the companies.

The first to place to start when you’re looking for companies with similar operating characteristics, is to make sure you’ve done your homework on the company you are analyzing.

Each industry and company is unique, so you’ll need to spend some time thinking about what operating characteristics are important to the industry and company you are evaluating, but there are a few traits that are generally important to most companies.


The world is getting smaller, and more and more companies are growing their international operations, but there still could be significant differences that could impact your analysis between, say, a company headquartered in the United States, versus a company headquartered in China.

Each country has different laws and regulations, which can impact a company’s operating results. They can also be impacted by factors that are more unpredictable, such as exchange rates.

Customer Base

Identifying whether a company has a similar customer base is important to effectively benchmarking one company to another. Two companies operating within the same industry could have very different customer profiles.

One company may target people over 50 with a product, while a similar company may be targeting the teenager demographic.

These companies may be similar in several ways, but it’s important to understand how the different customer profiles could impact future operating results. Teenagers are generally less committed to one brand, while the older generation may be a very loyal customer base.

Knowing who a company is selling to can be the difference between a successful, or unsuccessful analysis.

Life cycle of the company

Company’s grow, and generally become more stable in their old age. Start-up companies are known for being disruptive - volatile growth rates, quick product innovations, and less “red-tape” are staples of young companies.

However, as a company grows and expands its operations, it becomes more difficult to maintain the start-up culture. Companies also reach a certain size where growth becomes harder to maintain, and making the needle move requires a bigger and bigger investment.

Because of the impact a company’s age has on its operating results, knowing where a company is at in its life-cycle can be a differentiator between you and the rest of the field.

You are now one with nature

As you can see - financial ratio analysis is more than just calculations and the numbers of a company. Knowing the key drivers of a company’s operations can lead to big insights when identifying a peer group and completing your financial analysis.

Once you’re clear on the nature and key characteristics of a company, you can use this information to identify a solid peer group for benchmarking.

4. Define the Company’s Industry and Peer Group

Once you are comfortable that you have a full understanding of the company’s trends, industry and key operating characteristics, its time to find a solid list of companies for benchmarking.

You can start by evaluating the other companies who report the same SIC code as the company you are evaluating.

We already discussed how these codes are determined, so you know that the other companies within the category will be at..

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Effective asset management and efficiency is a key trait of successful companies.

But how do you know if a company is effectively managing its assets and receiving a high return on investing in those assets?

The answer is found by analyzing a company’s asset management ratios, or efficiency ratios, to determine whether that company is deploying and managing its resources effectively.

In today’s post we'll cover the basics of asset management ratios, what they measure, and why you should be analyzing these ratios to better understand a company’s operations.

We’ll also break down five key ratios that evaluate a company’s asset efficiency, and share a list of all asset management ratios, along with the formulas that you will need to calculate them.

What are Asset Management Ratios and What Do Asset Management Ratios Indicate?

These ratios measure how effectively and efficiently a company is managing its assets and producing sales. 

Knowing a company’s asset management ratios will give you a better idea of how a company is managing its capital, and whether they are efficiently turning assets into earnings for the company’s shareholders.

Strong companies utilize their assets to create additional cash flow and revenue for their business to reinvest and redeploy back into operating activities. If a company has too much of their capital tied up in assets, this can lead to shortfalls in operating cash flow.

You may be wondering:

I thought assets were a good thing? Those assets have value and they’ll get money eventually, so what’s the big deal if it takes a while?

Well, the problem with this scenario is that if a company continues to manage their assets at a low level, they’ll be forced to raise additional capital, or take on additional debt just to meet the immediate cash flow demands of the company.

Let's say you are analyzing a company, and the first thing you look at is its current ratio and you notice that, dang, this company is on point! Highest current ratio you have ever seen.

And look at Accounts Receivable - it’s three times higher than you would have expected, nice!

Not so fast.

As a fundamental investor, you know the importance of getting the complete picture, so you force yourself to carry out your analysis and dive into the asset management ratios of the company.

Uh-oh, your view of the company starts changing.

Their accounts receivable turnover ratio is way lower than industry averages! They have inventory piled up on the balance sheet, and it doesn’t look like they’re selling it as fast as they’re producing!

Where’d it all go wrong?

The answer is, assets can be a key part of an awesome company, but if the management team isn’t effectively utilizing those assets, and turning those assets into operating cash flow, the shareholders won’t be seeing the returns!

Our goal is to find companies to invest in that are well positioned with adequate assets to maximize cash flows and returns to investors.

What we don’t want to see is a company that is stacking up assets and burning cash, but not turning those assets into cash flow quickly enough to enhance the company’s growth.

Analyzing these ratios is a key step in effective financial analysis and fundamental analysis.

Now that our understanding of the overall principle of asset management ratios is clear, we can start looking at the different types of ratios and their formulas.

5 Key Formulas for Measuring How Well a Company Manages Its Assets

There are five main ratios that measure how a efficiently and effectively a company is managing its assets and using its assets to grow operations.

We’ll start with taking a look at the accounts receivable turnover ratio.

1. Accounts Receivable Turnover (A/R Turnover)

The accounts receivable turnover ratio is calculated by taking a company’s net credit sales during a period, and dividing it by the company’s average accounts receivable.

A/R Turnover  = Net Credit Sales / Average Accounts Receivable

The accounts receivable turnover ratio measures how effectively a company is extending credit and collecting amounts due from customers.

The higher a company’s accounts receivable turnover ratio, the more efficiently that company is extending credit and collecting cash.

To break it down, let’s say a company has amazing customers. They never haggle on credit terms, and they are never a day late in making payments.

Because of this, the company offers credit terms of 3 days, meaning a customer owes the company for services 3 days after the company bills the customer (this is very tight, generally when companies extend credit terms to customers they are about 30 days on average).

In this scenario, you would have a high A/R turnover ratio, because customers are consistently making purchases and paying the company very quickly.

A low A/R turnover ratio would indicate the company is extending longer terms (meaning the company isn’t collecting money quickly), or they are extending short terms to customers who aren’t paying their obligation by the due date.

Either way, not a good sign for the company!

As a quick example of the calculation:

Apple, Inc. (AAPL) reported accounts receivable of $17,874,000 and $15,754,000 as of September 30, 2017 and 2016, respectively. They also reported sales of $229,234,000 during 2017.

Apple’s AR turnover ratio for 2017 was the sales during the period, $229,234,000, divided by the average of the accounts receivable balance during the period (($17,874,000 + $15,754,000) / 2)).

Or, 13.63.

As investors we want companies to be collecting cash for sales quickly so they can reinvest that money into ramping up growth.

2. Inventory Turnover

The inventory turnover ratio is calculated by taking a company’s cost of goods sold during a period and dividing that amount by the average inventory during that period.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

The inventory turnover ratio measures how quickly a company is selling its inventory over a period of time.

If a company’s inventory turnover ratio is high, this would be an indicator that they are producing and selling inventory at a fast rate - which is good news for investors!

If the inventory turnover ratio is low, or slowing compared to the company’s historical turns, that could be an indicator that the company’s sales are slowing, or they aren’t managing their inventory levels effectively.

Evaluating a company’s inventory turnover ratio will give you a good idea of how a company is managing its inventory levels, and whether sales demand remains high for the company.

As investors, we are looking for companies that turn inventory quickly and efficiently.

3. Working Capital Turnover Ratio

Alright, we have arrived at our third key ratio, the working capital turnover ratio.

The working capital turnover ratio is calculated by dividing a company’s net annual sales by their average amount of working capital during the same 12 month period.

Working Capital Turnover Ratio = Net Annual Sales / Average Working Capital

For example:

Let’s take a look at how this would be calculated for Apple Inc over the 2017 period.

Apple’s working capital (current assets - current liabilities) was $27,831 and $27,863 for 2017 and 2016 (in millions), meaning an average working capital of $27,847.

Reported revenue was $229,234.

If we plug the reported numbers into the formula above, we end up with:

$229,234 / $27,847 = 8.23 Working Capital Turnover Ratio

Not bad!

The working capital turnover ratio measures how well a company utilizes its working capital to support their sales. A high working capital turnover ratio would indicate that the Company is able to fund its own operations, because cash is flowing in and out on a consistent basis.


Too high of a working capital turnover ratio could indicate that the company isn’t generating enough money to support its sales growth, which means they could become insolvent.

This is generally not a huge concern, but if you start seeing extremely high working capital turnover ratios, usually over 70%, it will be important to consider the potential implications of burning through working capital that quickly.

If a company’s working capital turnover ratio is low, this could indicate that there is a build up in key operating accounts (primarily, accounts receivable and inventory), which could indicate that they are carrying obsolete inventory, or aged receivables that will eventually be written-off.

4. Fixed Asset Turnover Ratio

The fixed asset turnover ratio is calculated by taking a company’s net sales during a period and dividing that by the company’s fixed assets (commonly referred to as property, plant and equipment (PP&E)), net of depreciation.

Fixed Asset Turnover Ratio = Net Sales / Fixed Assets, Net

The fixed asset turnover ratio measures the rate and efficiency that a company is generating net sales from its investments in PP&E.

If a company’s fixed asset turnover ratio is high, this is a good indicator that tells us the company is making smart investments in fixed assets, and those investments are paying off as they are generating net sales for the company.

Both positives in my book!

Generally, there isn’t a specific benchmark to use in your analysis that would tell you whether the ratio is high enough to warrant an investment.

For this reason, it is important to benchmark the calculated ratio against the company’s historical fixed asset turnover ratio (declining ratios could signal an issue), or benchmark the company’s calculated ratio against direct competitors.

The fixed asset requirement for a company to be successful is very different depending on the operations of a company.

For example:

An internet company would have a much different fixed asset requirement than a heavy machinery manufacturing company.

Comparing the internet company’s fixed asset turnover ratio to the heavy machinery manufacturing company wouldn’t provide much value.

In general, the more heavily a company relies on its fixed assets to operate, the more relevant the fixed asset ratio is to that company.

5. Asset Turnover Ratio

The asset turnover ratio is calculated by taking a company’s revenues during a period and dividing that by the company’s average total assets.

Asset Turnover Ratio = Revenues / Average Total Assets

The asset turnover ratio is similar to the fixed asset turnover ratio, as it measures the level of efficiency that a company is using its assets to generate sales, but it takes it one step further by including all assets, and not just PP&E.

If a company’s asset turnover ratio is high, this is a good indicator that the company is well positioned with revenue generating assets, and management is effectively managing those assets to generate sales.

It’s important to keep a few things in mind when analyzing a company’s asset turnover ratio:

  1. This ratio can fluctuate depending on the nature of the businesses operations and the industry the company operates in; and
  2. Because of this, finding the right benchmark to interpret the asset turnover ratio is very important.

For example, retail stores generally have higher asset turnover ratios, as the business doesn’t require a significant investment in assets to operate. On a very small scale, think about if you were to start a small boutique clothing shop.

All you would need was enough inventory to stock the shelves, you could then lease a store front, and away you go. The only significance asset required would be the inventory.

But think about this from an industry on the other end of the spectrum.  Let’s say a telecommunications company.

Why you might ask?

Because telecommunication companies require a heavy asset load to operate and generate revenue. Think about the amount of equipment, cabling, hardware, etc… it takes for AT&T to build out their wireless network.

None of us could even think about starting a competitor of AT&T because of the investment it would require to build out the assets in order to operate.

Check out the example below:

(in millions) Wal-Mart Stores AT&T Inc.
Beginning Assets 199,825 403,821
Ending Assets 204,522 444,097
Average Total Assets 202,174 423,959
Revenue 500,343 160,546
Asset Turnover Ratio 2.47 0.38

As you can see, Wal-Mart’s asset turnover ratio is much higher than AT&T’s.

Does that mean that Wal-Mart is a better investment than AT&T?

Not necessarily.

It would require additional analysis and insight into how each company’s ratios are performing over time, and whether they have higher or lower ratios than their direct competitors.

In this example, the vastly different operations of AT&T and Wal-Mart make benchmarking one asset turnover ratio against the other very difficult.

For this reason, it's important to make sure that you're comparing financial ratios to similar competitors in order to get an accurate interpretation of the management team and operating results.

Complete Asset Management Ratios List and The Formulas You Need to Calculate Them

We’ve summarized the remaining asset management ratios below (including the ones we covered above), so you have a complete list of ratios and formulas to refer back to when you are knee deep in your fundamental analysis.

Ratios Formulas
Asset Turnover Revenues / Average Total Assets
Inventory Turnover Cost of Goods Sold / Average Inventory
Days Sales In Inventory 365 days / Inventory Turnover Ratio
Accounts Receivable Turnover Net Credit Sales / Average Accounts Receivable
Accounts Payable Turnover Total Purchases / Average Accounts Payable
Capacity Utilization Actual Output / Potential Output x 100
Cash Conversion Cycle Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
Defensive Interval Current Assets / Daily Operating Expenses
Fixed Asset Turnover Sales Revenue / Total Fixed Assets, Net
Working Capital Turnover Net Annual Sales / Average Working Capital

These ratios will give you a good idea of whether a company is managing their resources efficiently.

Trends that indicate slowing turnover of the company's assets can be a warning sign that trouble may be heading down the pipeline.

The Power of Asset Management Ratios in Your Stock Analysis

Asset management ratios are a key piece of the overall fundamental analysis puzzle.

If a company's ratios indicate they aren’t managing their assets effectively and efficiently, that doesn’t bode well for the management team, or the company’s long-term growth potential.

When looking for stocks that provide a higher return and lower risk, we want to invest in companies that are converting assets to higher sales and generating operating cash flows to sustain the business.

Assets aren’t really assets if they aren’t managed correctly!

So, dig deep on a company’s asset management ratios before you invest to avoid surprises down the road.

If you're interested in finding stocks with optimal asset management ratios, check out our article that walks through the process of using a value stock screener to identify investment ideas.

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